Considering retiring early, but worried about healthcare (ACA) costs?

📌 Summary & Key Takeaways

• ACA Subsidies Can Eliminate $12,000–$15,600 in Annual Health Costs Per Person: Unsubsidized health insurance for a 60-year-old ranges from $1,000 to $1,300/month ($12,000 to $15,600/year per person, or $28,000/year for the modeled couple). Strategic financial engineering of your withdrawal mix can qualify early retirees for Premium Tax Credits (PTC) that eliminate premium costs prior to Medicare at 65.
• MAGI Is Fully Controllable via Account Arbitrage: Traditional IRA distributions count dollar-for-dollar toward Modified Adjusted Gross Income (MAGI), while Roth IRA distributions and cash savings generate $0 MAGI. Early retirees can fund virtually any desired lifestyle spend (such as the $100,000/year scenario modeled below) while reporting only the minimum taxable income needed to clear the Medicaid floor (~$29,865 for a couple).
• Precision Targeting Between the 138% and 400% FPL Cliffs: For a married couple (2-person household) in a Medicaid expansion state, MAGI must stay strictly above 138% FPL (~$28,207) to avoid Medicaid, while staying below 400% FPL ($81,760). A single dollar over the 400% cliff forfeits thousands in annual Premium Tax Credits.

I will show you how to reduce (and possibly eliminate) the cost of ACA coverage by balancing your traditional and Roth IRA contributions and subsequent withdrawals. Doing so allows you to generate specific amounts of taxable income, giving you flexibility in managing your MAGI (Modified Adjusted Gross Income) to minimize ACA costs. This is more complex than it seems, because subsidies have both a floor and a ceiling that must be avoided.

The Problem

ACA health insurance can be expensive. If you go to the ACA Marketplace and enter your information, you will see that the cost of coverage varies depending on your income. Unsubsidized premiums range from roughly $1,000 to $1,300 per month for a 60-year-old. That is $12,000 to $15,600 per year per person.

The key word is "unsubsidized." There are ACA subsidies available to reduce the cost of coverage. The amount of subsidy you receive depends on your income. The lower your income, the higher your subsidy. The formal name for these subsidies is Premium Tax Credits (PTC).

The Solution

The key in all of this is realizing that you can control your MAGI by controlling how much you withdraw from your traditional IRA. You can then use cash or Roth IRA withdrawals to close the gap between your MAGI and the amount needed to fund your lifestyle. Cash and Roth IRA withdrawals do not count as income for MAGI purposes (taxes have already been settled).

I use the Traditional IRA Withdrawal and Roth Conversion Calculator to show how this works. First, consider the cliffs to avoid.

The Cliffs

There are two cliffs to track when managing ACA subsidies (Premium Tax Credits, or PTC). Both are based on the Federal Poverty Level (FPL):

1. The Medicaid Eligibility Cliff (100%–138% of FPL) - If you are eligible for Medicaid, you are not eligible for PTC.
2. The 400% FPL Cliff - If your MAGI exceeds 400% of FPL, you are not eligible for PTC.

For tax year 2025, the federal poverty level is $15,060 for a 1-person household, and $5,380 for each additional person (in the 48 contiguous states; Alaska and Hawaii have slightly higher FPL).

The reason there is a range for the Medicaid Eligibility Cliff is because some states have expanded Medicaid coverage, while others have not. (Medicaid coverage is determined by states, not the federal government.) The federal government set PTC eligibility based on a combination of Medicaid coverage eligibility and the federal poverty level.

It is important to note that the 400% FPL cliff is a true cliff; exceeding it by even $1 eliminates eligibility.

For more details on PTC, see the IRS Premium Tax Credit (PTC) Overview and IRS Form 8962, Premium Tax Credit (PTC).

IRS Form 8962 only mentions the 100% FPL floor because that is the federal legal minimum for PTC eligibility. Federally, anyone between 100% and 400% FPL is technically "eligible" for tax credits. However, you cannot receive a tax credit if you are eligible for Medicaid. And that limit is 138% of FPL in states that expanded Medicaid.

Summary of PTC Eligibility

For States WITHOUT Expanded Medicaid Coverage (AL, FL, GA, KS, MS, SC, TN, TX, WI, WY)

• PTC available IF income is > 100% of FPL
• Medicaid eligibility is typically based on categorical requirements—meaning you must fall into a specific group (like being a parent or having a disability) in addition to having an extremely low income.

For States WITH Expanded Medicaid Coverage (states not listed above)

• Medicaid eligible if income is <= 138% of FPL
• PTC available IF income is > 138% of FPL
  • If you purchase ACA coverage with income <= 138% of FPL, you are not eligible for PTC and will pay full price.

Summary Table: Who Pays for What?

Baseline Scenarios & Simulation Results

Let's look at two examples to see how this works. In both scenarios, I picked account balances projected to last through life expectancy, isolating how holding money purely in a traditional IRA compares to holding a combination of traditional and Roth IRAs. Returns are modeled as constant to isolate the specific impact of ACA subsidies. Sequence of returns risk is therefore set aside for this demonstration.

In both scenarios I assumed the following parameters:

• Retiring at current age of 60 (final age 95)
• Target spend: $100,000 per year (total disposable income)
• Filing status: Married Filing Jointly
• Social security income of $80K starting at age 67
• Real returns: 4%
• State: CO (my model ignores state tax - state choice is only relevant for Medicaid expansion status)
• ACA premiums: $14,000 per year per person ($28,000/year total)
• 400% FPL threshold is $81,760
• Medicare base premium: $2,400 per year per person ($4,800/year total)

Friction Cost: The analysis and charts below refer to "friction cost", which is the sum of federal tax paid and healthcare premiums paid minus PTC subsidies received.

Case 1 - Traditional IRA Only: $1.15M

This is the baseline scenario, showing the unoptimized strategy. This chart was created using the Traditional IRA Withdrawal and Roth Conversion Calculator with the inputs shown above (with multi-year optimizations disabled for this baseline comparison).

Key points:

• During the first 5 years (prior to Medicare eligibility), ACA premiums are $14,000 per year per person, or $28,000 per year total.
• Total friction cost is $41,462 each year ($13,462 in federal income tax plus $28,000 in unsubsidized healthcare premiums).
• Because the only method to generate spending money is to withdraw from your Traditional IRA, and that is taxable income, MAGI ($141,462) exceeds 400% of FPL ($81,760). The result is that the couple is not eligible for any ACA subsidies across all five pre-65 years.
• At age 65, Medicare reduces health costs to $4,800 per year, and at age 67 Social Security ($80,000/year) reduces required portfolio withdrawals, leaving $122K in the Traditional IRA at age 95.

Case 2 - Traditional IRA: $140K, Roth IRA: $800K

The only parameters changed for this example are the starting account balances: $140K in Traditional IRA and $800K in Roth IRA. The $140K in the traditional IRA was chosen as the minimum amount needed to generate the required MAGI to stay above the Medicaid cliff.

Key points:

• Prior to age 65, the couple pulls just enough money from the traditional IRA to generate the MAGI needed to stay above the Medicaid cliff ($29,865), and uses Roth IRA withdrawals to fund the remaining spending need.
• For the first 5 years, the couple is eligible for PTC that covers 100% of their ACA premiums ($28,000/year).
• Total friction cost is $0; they pay no federal tax and no ACA premiums.
• At age 65, they become eligible for Medicare, and frictional costs shift to $4,800 per year for Medicare premiums, leaving $72K in the Roth IRA at age 95.

Comparing the Two Cases

At first glance, Case 2 preserves pure tax-free Roth wealth at age 95 ($72K), whereas Case 1 suffered $207,000 in friction costs during the pre-65 window ($41,462 × 5 years).

Do These Cases Compare Apples to Apples?

If assuming the couple in Case 2 was in the 22% marginal tax bracket during accumulation, saving $800K in the Roth IRA required $1,025,641 in pre-tax income. Thus the couple in Case 2 spent about $1.165M ($1.025M + $140K in the traditional IRA) in pre-tax income to generate their balances, while the couple in Case 1 spent $1.15M in pre-tax income to generate their balance.

The difference is about $15K in pre-tax income. These two cases are nearly identical in terms of savings requirements.

Why Did Case 1 Suffer?

The unoptimized Traditional IRA couple suffered purely because of the ACA subsidy cliff: having zero Roth funds forced them to withdraw all $100K+ from Traditional pre-tax balances, blowing past 400% FPL and forfeiting $140,000 ($28,000 × 5 years) in health insurance tax credits.

Actually - the Traditional IRA Couple Won (When Optimized)

In the baseline scenarios above, I disabled multi-year optimizations to establish a clear initial comparison. When I ran the model with all multi-year optimizations enabled, the picture sharpened:

💡 The Optimization Advantage: With multi-year dynamic optimization enabled, the couple finishes with $384,000 in total wealth ($300K Traditional + $7K Roth + $77K Cash) at age 95—compared to just $122K in Case 1 and $72K in Case 2. Strategic conversion timing delivers more than triple the final wealth of the unoptimized paths.

What happened? The optimizer recognized that by taking a targeted upfront conversion from the traditional IRA into the Roth IRA at age 60 ($202,900), it could drop MAGI to $32K–$82K in years 2 through 5 and harvest up to $28,000/year in ACA subsidies (PTC), saving over $100,000 in healthcare premiums while preserving low withdrawal tax brackets later in retirement.

Caveats and Practical Considerations

• Age 59.5 Rule: With a traditional IRA, withdrawals prior to age 59.5 are subject to a 10% penalty (unless using an exception like SEPP / Rule 72(t)).
• 5-Year Conversion Rule: With a Roth IRA, you cannot withdraw converted balances penalty-free for 5 years unless you are 59.5 or older. The model enforces this rule.
• Taxable Income Inflows: Capital gains, dividends, and interest from taxable brokerage accounts increase MAGI. Make sure to account for taxable investment income when targeting the PTC band.
• Career Breaks: If you take a partial-year sabbatical where your income in the working months already pushed MAGI over 400% FPL, you will not receive PTC for that tax year.
• Modeling Tool: The utility of calculators like this is to understand how account balances and withdrawal strategies affect your tax liability, PTC, and overall plan durability.

The Policy Reality: Optimizing Within the Rules

A common question is whether early retirees with substantial assets should utilize ACA subsidies: "Is it appropriate for households with $1M+ in assets to receive healthcare subsidies?"

My perspective as an engineer is pragmatic: the tax code is an explicit rule system. Tax optimization within legal parameters is standard financial planning—whether it is corporations managing depreciation or retirees managing MAGI. If you disagree with the policy structure, the remedy is at the ballot box. But in building a financial plan, an engineer models the actual rules of the system as they exist.

Key Takeaways

• ACA subsidies significantly cut healthcare costs: For early retirees, Premium Tax Credits can eliminate $12,000 to $15,600 in annual insurance expenses per person.
• Account diversification gives MAGI control: Having money in both a Traditional IRA and Roth IRA allows precise control over MAGI to optimize ACA subsidies.
• Multi-year optimization wins: You can use the Traditional IRA Withdrawal and Roth Conversion Calculator to see how account balances and withdrawal timing impact tax liabilities and PTC.
• Tax rules evolve: Standard deductions, senior bonuses, and ACA subsidy thresholds are subject to legislative changes; monitor your plan periodically.

Tax issues are complex. This post uses explicit assumptions to demonstrate how MAGI can be controlled to optimize ACA subsidies. Your personal situation—Social Security timing, state taxes, pensions, and taxable assets—will differ. This is not tax advice. Consult a qualified tax professional before executing major withdrawal strategies.